Why Western Gas Equity Is The Best Delaware Basin Midstream Play

Barclays upgraded Western Gas Equity Partners LP WGP to Overweight from Equal-Weight, saying the company "offers the best way to play Delaware basin midstream opportunity."

The brokerage says WGP, which is the general partner of Western Gas Partners, LP WES, is a levered play on the largest processor in core part of Delaware basin, where well economics support sub $40 crude price.

"On a per unit basis, WES/WGP offers greatest leverage to core Delaware by wide margin. We are raising WGP's 5-year growth forecast to 18% from 15%," analyst Heejung (Helen) Ryoo wrote in a note.

"We estimate that water and additional processing (outside of Ramsey build out) presents close to $1 billion capex just to support Anadarko Petroleum Corporation APC's production growth outlook into 2021. Given sizable third party business in Delaware we believe total opportunity set could be greater," Ryoo continued.

Anadarko is spending $200 million on midstream build out in 2016, with majority spent on crude infrastructure. This level of spending over the next five years could double the drop down inventory, the analyst noted.

As such Ryoo raised 2017-2020 capex to $400 million per year from $360 million and drop down assumptions to $500 million per year from $425 million.

Meanwhile, the analyst noted that investment in WGP/WES takes limited risk in playing crude price recovery as it can raise capital at favorable cost given superior balance sheet quality.

"WES has maintained its Debt/EBITDA at under 4x even in the current price cycle. We forecast bank covenant metric to be around 3x and rating agency metric to around 3.5x," Ryoo added.

The analyst raised the price target of WGP to $52 from $48 and WES to $63 from $60.